Some news stories say profits dropped 21%, others say profits rose 12%. Why?
The news today is a bit confusing at first glance.
Barclays has seen a “sharp fall in profits”, according to the BBC – some 21% down in the year to 31 December 2014.
Yet over on Sky News, Barclays has apparently grown profits and “beat City expectations”, with a “12% rise in annual profits to £5.5bn”.
And City A.M. is reporting that “pre-tax profits soared” at the banking group.
What the devil is going on?
It all comes down to the money Barclays has had to put aside for those pesky PPI claims and for expected settlements and costs in the forex rate-rigging investigation.
Barclays has had to set aside a colossal amount of money to deal with the fallout from the two scandals.
It’s put aside an extra £750m for the forex manipulation probe, taking its total provision to £1.25bn, and another £200m to handle PPI claims.
If you don’t include these amounts and other provisions the bank has had to make, Barclays’ pre-tax profits in 2014 rose 12% to £5.5bn.
This £5.5bn is the figure that has exceeded City expectations. It has been achieved in part by Barclays cutting operating costs by £1.8bn – some 10%. Some of these savings were made by cutting 14,000 jobs, a 5% reduction in headcount.
Barclays said in its results announcement that it expects to make furthers cost reductions in 2015, and it’s announced a 22% reduction to its bonus pool.
Anyway – back to the seemingly conflicting headlines about whether Barclays’ profits rose or fell in 2014…
When you do include all those provisions it’s had to make for PPI and forex rigging, Barclays’ statutory pre-tax profits fell 21%, from £2.9bn to £2.3bn.
Statutory vs underlying profit
The “21% profit fall” to £2.3bn, which accounts for the PPI and forex and other provisions, refers to Barclays’ statutory profit. Statutory profit means the actual bottom line of its 2014 profit and loss account.
The “12% profit increase” to £5.5bn, meanwhile, is the bank’s underlying profit. Underlying profit excludes exceptional and one-off items, like the very expensive provisions Barclays had to make for PPI and the forex manipulation investigation.
Both measures are valid ways to describe profit, which is why it seems that reports today are conflicting. Some news outlets have focused on the underlying profit (the one that grew), which some commentators see as a more accurate measure of a bank’s health and long-term growth trend, though underlying profit does kind of just leave out, you know, all the bits of money that Barclays would rather forget about.
Other news sources have focused on the statutory profit (which fell due to the massive PPI and forex provisions), which is, in effect, the real money Barclays actually has to play with in profit terms at the end of 2014 (roughly speaking).
Barclays explained that as well as the £1.1bn net provision for PPI and interest rate hedging redress, and the £1.25bn for the forex “ongoing investigations and litigation”, it also made a £446m loss on the announced sale of the Spanish business and had to account for a few other costs and revaluations. You can see the full details on page 8 of its results announcement.
At its strongest since the crisis?
Barclays itself says it is in a strong position.
“Barclays today is a stronger business, with better prospects, than at any time since the financial crisis,” said Antony Jenkins.
“While our work in transforming the bank is not yet complete, our performance in 2014 gives us confidence that we are on the right track.”
Do you agree? Let me know in comments below.